06 Jun 2014

DeLong and Krugman Have a High Rate of Deprecation (sic)

Climate Change, David R. Henderson, DeLong, Krugman, Piketty 9 Comments

We also would have accepted, “Why oh why can’t we have better Keynesian bloggers?!”

This isn’t worth me writing up in another outlet, but I know some of you like this petty stuff… (I sure do.)

==> Some of you may remember that Krussell and Smith wrote up a Note on Piketty, explaining why his model was unorthodox because it used net rather than gross figures, making it yield odd outcomes and further being difficult to reconcile with actual savings behavior. To illustrate their point, they chose a hypothetical calculation involving a 10% depreciation rate on physical capital.

Well, Brad DeLong bit their heads off, writing:

But with an economy-wide capital output ratio of 4-6 and a depreciation rate of 0.1, total depreciation–the gap between NDP and GDP–is not its actual 15% of GDP, but rather 40%-60% of GDP. If the actual depreciation rate were what Krussall and Smith say it is, fully half of our economy would be focused on replacing worn-out capital.

For the entire economy, one picks a depreciation rate of 0.02 or 0.03 or 0.05, rather than 0.10.

I cannot understand how anybody who has ever looked at the NIPA, or thought about what our capital stock is made of, would ever get the idea that the economy-wide depreciation rate δ=0.1.

And if you did think that for an instant, you would then recognize that you have just committed yourself to the belief that NDP is only half of GDP, and nobody thinks that–except Krusall and Smith. Why do they think that? Where did their δ=0.1 estimate come from? Why didn’t they immediately recognize that that deprecation estimate was in error, and correct it?

Now that’s a bit over-the-top, when the main result (i.e. that Piketty’s use of net rather than gross leads to weirdness, and is also inconsistent with the empirical literature) goes through, whether you use 5% or 10%. (See Krussell’s response and Alex Tabarrok too.) Also, it’s not like they picked 7.485%; no, they used 10%, which is a rather nice round number.

For what it’s worth, if you look at the BEA’s estimate of the replacement cost of the total U.S. capital stock (“fixed assets and consumer durable goods)”, in 2012 (latest year available) it was $53.6 trillion (and that’s in current dollars, not price-inflation-adjusted). Well, nominal GDP in 2012 was $16.2 trillion. So the K/Y for 2012 (if these are the numbers to use) was 331%, which is a lot lower than DeLong’s range of 400% – 600% of GDP. (Incidentally, I emailed the BEA and asked what do I look at for estimates of “total US capital stock” and that’s where they pointed me.)

==> In other news, Krugman bit off Roger Pielke Jr.’s head for being both an idiot and evil, when it comes to the EPA power plant regulations and the analysis of emissions reductions more generally. It’s not worth me going over the whole back and forth, but if you follow the links you can get up to speed. Anyway, David R. Henderson was glad to see Krugman finally acting the economist again (and I agree with David, Krugman’s post did a good job explaining tradeoffs and how “carbon intensity” is not merely an engineering concept but also an economic outcome). But I had to clarify in the comments the perfidy involved:

David,

Obviously I would have to recuse myself if I were ever a judge in a trial involving Krugman, but I think you are being too kind here. I agree that Pielke Jr. is probably a little bit confused in the way he’s using “technology,” but some points:

1) When Pielke Jr. refers to a “cap” on Chinese emissions, he doesn’t mean “a limit on the growth.” No, he means a hard ceiling that stops emissions growth immediately.

2) My description might surprise you, because Krugman matter-of-factly asserts that Pielke’s letter was motivated by the Obama Administration EPA power plants rules, and also tells that Pielke “is actually committed to undermining the case for emissions limits any way he can.” But, Krugman just made up both “facts.” If you look at Pielke’s letter, he says in the beginning that he is responding to this earlier FT piece about a Chinese academic who wants an absolute halt in growth of Chinese emissions to kick in in 2016. Also, if Krugman had bothered to check Pielke’s blog, he’d say that Pielke *endorsed* the EPA’s power plant rules on Tuesday.

3) It’s extremely gracious of you to praise Krugman for finally writing like an economist, when he endorses top-down controls (power plant rules, CAFE standards) and talks about “saving the planet” as the policy goal, without tongue in cheek. (And by the way, he’s not just being ironic in referencing leftist environmentalists. In several recent posts, Krugman has non-ironically talked about what needs to be done to “save the planet.’) What happened to enacting policies such that MC = MB?

* * *

None of this is a criticism of you, David; I realize you probably want to praise Krugman when you can, so people trust you when you criticize him. I’m just pointing out that Krugman was particularly slippery in this post, simply inventing positions and attributing them to Pielke, and then he ended it up with this gem: “I guess I should thank Pielke for his intervention, which has helped clarify how we should think both about energy issues and about him.”

9 Responses to “DeLong and Krugman Have a High Rate of Deprecation (sic)”

  1. Andrew' says:

    So is the scarcity of capital supposed to be increasing or the productivity?

    “not merely an engineering concept but also an economic outcome”
    Okay. So which Wal-Mart do I go to to pick up a turn key carbon capture and sequestration? Do I need more than that sentence to dismantle Krugman’s point? You can’t just make a costless choice to add an incredible amount of insulation to ALL the ____’n structures. I’m going to start sending him a bill for the NYT page views.

    • Andrew' says:

      “e.g. the sharp decline in US intensity after the oil shocks of the 1970s”

      What a great life to be able to spout about anything with no shame. At my last employer, our department had multiple file cabinets filled with 70′s vintage energy projects that they shelved. This means (1) they had no idea what to do (2) still had no idea what they would do and (3) it completely disabused me of the “end of history” view of progress and terrified me.

      • Andrew' says:

        Good lord, I can’t take it anymore Bob.

        Does ANYONE want the 70s back?

        We seriously need a theory of the Krugman.

        • Andrew' says:

          Multi-posting because I can only stand to read his piece in segments. Maybe he scores the NYT more page clicks this way.

          Isn’t it also amazing how even within every paragraph where he accuses someone of, for example, concern trolling or rank pulling, he proceeds to do it himself. I’m not sure if he ever accuses anyone of strawmanning or ad hominem because that might be too shameless even for him.

          “Pielke is regarded among climate scientists as a concern troll – someone who pretends to be open-minded, but is actually committed to undermining the case for emissions limits any way he can. But is this fair?”

          See what he did there? Krugman is saying “Let’s be open-minded about Pielke” while being actually committed to undermining him any way he can. Concern trolling WITHIN an accusation of concern trolling!

          He goes on to strawman Pielke by claiming Pielke’s argument is that the economy can’t adjust to increased costs. It can of course, but Krugman implies it’s no biggie, when it is a HUGE problem.

          Anyone who doesn’t have KDS by now needs to explain to their doctor why not. There is something seriously wrong with them.

          • Andrew' says:

            And and and….Carbon reducing technology of the future IS the economy adjusting!

            AAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAAARRRRRRRRRRRRRRRRRRRRRRRRRRGHHHHHHHHHHHHHHH!!!!!

            Wait, did PK change his blog to correct his errors you refer to in thinking Pielke was referring to the banning of coal electricity?

            I’m also not sure why David Henderson is so complimentary of his economics. He basically blows off the fact that “the prices will be too damed high!” that Pielke is tacitly talking about. I suspect if you asked Pielke “Prices?” he say “well, yah, but you can’t just ban coal electricity and expect the economy to adjust instantly as if you just bought and sold a GE stock share.” Then he’s say “wait, I wasn’t even referring to Obama!”

            Anyway,

            Notice, PK has zero ideas on this. All his ideas are on strawmanning the political opposition. Sometimes he actually resorts to economics, but almost never. I personally have never seen it happen.

            If you go read the Pielke letter (why would Krugman attack a letter in the FT?) Pielke’s point is very obvious, very common sense, and absolutely correct. Why would a Nobel prize winner make such an idiotic response as Krugman does to a gated letter to the editor making a very standard argument just to snipe the author? It has got to be the two-party system.

            Okay, to sum up:

            Pielke references an actual economic model and then gives support (e.g. Europe has circumvented carbon caps) for why he isn’t against carbon caps, reality is!

            Krugman responds: “Is not! Na na na boo boo!”

  2. Transformer says:

    FWIW: I think DeLong gets the capital output ratio of 4-6 directly from Piketty ( see chapter 5). Interestingly Piketty ,whenever he talks about depreciation, seems to use a 2% rate.

    • Tel says:

      For tax purposes (in Australia) there’s a table of depreciation rates:

      Effective life less than 3 years — immediate write-off.

      Effective life 3 to less than 5 years — use 60% depreciation

      Effective life 5 to less than 6 2/3 years — use 40% depreciation

      Effective life 6 2/3 to less than 10 years — use 30% depreciation

      Effective life 10 to less than 13 years — use 25% depreciation

      Effective life 13 to less than 30 years — use 20% depreciation

      Effective life 30 or more years — use 10% depreciation

      There’s also a table of what they consider typical effective life estimates of various items.

      https://www.ato.gov.au/Business/Capital-allowances/In-detail/Schedules-and-guides/Guide-to-depreciating-assets-2012-13/?page=22

      For example, laptops are considered to have an effective life of three years, so they use a scale of 60% depreciation. You can also check the second hand market for refurbished laptops greater than a year old, or also for second hand mobile phones.

      • Transformer says:

        2% seems way too ,low to me. That would mean that the average bit of capital (whatever that might be) would have to last 50 years.

    • Tel says:

      Here’s an article on cell phone resale value:

      http://priceonomics.com/phones/

      They make a big deal of out iPhone holding its value slightly better than Android or Blackberry. I would put that down to the relative rationality of the buyers… but anyhow none of them hold value particularly well. They show 18 month depreciation, I’ve translated to the more common per-annum rate:

      iPhone: 34.5% per annum depreciation.
      Blackberry: 44.8% per annum depreciation.
      Android: 43.9% per annum depreciation.

      So just as an example, I purchased the Nexus 5 which is selling for $400 at the Google shop, as comparable with the iPhone 5s which is selling around $700. Both have 16G storage, the Nexus 5 has a slightly better display, they both have an 8 megapixel camera, the Nexus 5 runs a Qualcom snapdragon 800 (ARMv7 @2.2GHz quad-core) while the iPhone runs an Apple A7 (ARMv8 @1.5GHz dual-core).

      Applying depreciation at the above rates, in 2 years the iPhone will be worth $400 as a resale so it would have cost me $300 for those two years.

      The Nexus 5 will by worth $270 as a resale so it would cost me $130 for those two years. Not that I’m seriously intending to resell, but who knows.

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